Income smoothing mechanisms after labor market transitions

This article quantifies several household income smoothing mechanisms following labor market shocks. These shocks correspond to individual transitions between employment, unemployment and inactivity. The analysis covers 25 European countries for the period 2004-2011. We identify the relative role of labor and non-labor household income sources, income taxes and individual and household transfers in smoothing income fluctuations. We conclude that the tax and transfer system is the main household insurance mechanism following individual labor market transitions. This finding is robust before and after the Great Recession of 2009. Quantitatively, the relative role of these smoothing mechanisms is conditional on the characteristics of the labor market shock and varies across countries in the sample. Finally, even though we do not identify a relevant labor market response of household members in the intensive margin, household income pooling is an important smoothing mechanism among couples.